Does the Federal Reserve have to cut interest rates this year?


Tractor trailers cross the Peace Bridge at the Canada-US border in Fort Erie, Ontario, Canada, on Monday, Feb. 3, 2025.
On Monday, February 3, 2025, tractor trailers crossed the Peace Bridge, at the Canada-US Border in Fort Erie (Ontario, Canada).

Cole Burston/Getty Images/Bloomberg

What you need to know

  • Federal Reserve officials have become more conservative in their interest rate decisions due to the threat of a trade war involving the U.S.
  • The Fed was already in "wait and see" mode, holding interest rates steady to try to reduce inflation.
  • A Fed official stated that the central bank will likely keep rates unchanged while it monitors policies and determines if they are leading to inflation.

Like everyone else, officials at the Federal Reserve are watching and waiting to see what tariffs President Donald Trump will impose and what effect they'll have on the economy.

Trump delayed the 25% tariffs for Canada and Mexico by a month, but still plans to impose a 10% duty on Chinese imports starting on Tuesday. Federal Reserve officials slowed down the ease of their monetary policies in the most recent Federal Reserve meeting due to the uncertainty surrounding potential tariffs.

It seems that Monday's actions have not given officials any more clarity on whether they will cut rates. Two Fed policymakers noted the inflation risks of Trump's tariffs in separate remarks Monday.

"What we're seeing this morning does really highlight that there's a lot of uncertainty about how policies unfold. And without knowing what actual policy will be implemented, it's just really not possible to be too precise about what the likely impacts are going to be," said Susan Collins, president of the Federal Reserve Bank of Boston, in an interview on CNBC.

Inflation Running Above Fed's Target

As the trade war looms, Fed officials struggle to control the inflationary surge that followed the pandemic. The Fed had set a target for inflation of 2% per year. As of December 2018, the rate was above that. Fed officials raised the Fed’s interest rates in January. They wanted to prevent an inflationary spike and keep borrowing at bay.

If the Fed encounters any failures in its fight against inflation, it may decide to keep rates high or raise them. Collins, however, said that the Fed would not likely raise rates when tariffs cause an increase in price if the rise does not result in a continued acceleration in consumer prices or if the consumers do not expect higher inflation.

The Consumer’s Inflation Expectations Are Important

Fed officials often say that consumer expectations of inflation can become a self fulfilling prophecy. People can increase their spending when they anticipate higher prices, and this can create more demand which in turn can drive up prices.

Bloomberg reports that Raphael Bostic (president of the Federal Reserve Bank of Atlanta) made similar statements to reporters, after giving a talk at the Rotary club of Atlanta. According to him, the Fed will likely keep interest rates the same while monitoring the effects of tariffs over the next few months.

Raphael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta, during a Bloomberg Television interview at the Kansas City Federal Reserve's Jackson Hole Economic Policy Symposium in Moran, Wyoming, US, on Friday, Aug. 23, 2024.
Atlanta Fed president Raphael Bostic during an Interview with Bloomberg Television on August 23, 2024.

Natalie Behring / Bloomberg / Getty Images

“There’s a state of play where you might look through the tariff and not have it be a major driver for policy, but again, that depends,” Bostic said to Bloomberg. “To the extent that were to impact things like inflation expectations—I think it would be appropriate to respond with policy in some way.”

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leadzevs/ author of the article

LeadZevs (John Lesley) is an experienced trader specializing in technical analysis and forecasting of the cryptocurrency market. He has over 10 years of experience with a wide range of markets and assets - currencies, indices and commodities.John is the author of popular topics on major forums with millions of views and works as both an analyst and a professional trader for both clients and himself.

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